Corporate Governance is not just about how a company is directed and controlled to maximize performance and ensure accountability to stakeholders. Better governance practices and processes have become imperatives for both national and global economies. A company that is run very efficiently and responsibly will perform very well and ultimately contribute to strengthening the economy.
Public, private and non-profit organisations all need to be governed – apart from day-to-day management of the entities by their executive teams. Corporate governance is the responsibility of the governing body, or board of directors in the case of companies.
The first corporate governance codes were introduced in December 1992 in response to corporate failures in the United Kingdom. A report, known as the Financial Aspects of Corporate Governance, was produced by a committee headed by Sir Adrian Cadbury. Now referred to as the Cadbury Report, the report significantly influenced corporate governance thinking around the world. Other countries followed suit, France (Vienot Report, 1995); South Africa (King Report, 1994); Canada (Toronto Stock Exchange recommendations on Canadian board practices, 1995); The Netherlands Report (1995); and Hong Kong (a report on corporate governance from the Hong Kong Society of Accountants, 1996). These reports tried to forestall the abuse of power by corporate entities.
But at the turn of the 21st century, the world began to experience some corporate challenges, which led to the review of corporate governance practices. One of the widely-recognised outcomes of these efforts was the United States’ Sarbanes-Oxley Act of 2002, also known colloquially as SOX. The Act requires certification of internal auditing, increased financial disclosure, and it also imposes criminal penalties on directors for non-compliance. SOX is considered one of the most influential pieces of corporate legislation in the world. It was built on the idea that corporate governance should not be left to the discretion of directors of companies and their chief executives.
Nigeria also has its fair share of corporate governance history. Before the 1990s, the principal company law in Nigeria was the Companies Act 1968, which was modelled after the Companies Act 1948 of the United Kingdom. The law was repealed and replaced by the then Companies and Allied Matters Decree No. 1 of 1990. There were several modifications over the years but the principal statute regulating companies in Nigeria today is the Companies and Allied Matters Act Cap. C20, 2004. The current statute was the product of a rigorous process led by the Nigerian Law Reform Commission.
The first corporate governance code in Nigeria was the Code of Corporate Governance for Banks and Other Financial Institutions in Nigeria. It was issued by the Bankers Committee in August 2003. The regulation was introduced in response to the financial crisis of the 1990s. The 11 principles of the regulation focus on appointments, board proceedings, board responsibilities, assessment and audit committees. Unfortunately, this code did not have much impact.
Analysts have attributed the lack of impact to the issuance of another legislation by the Securities and Exchange Commission (SEC) two months after the Bankers Committee had issued its corporate governance code. In October 2003, SEC’s 17-member committee, headed by Atedo Peterside, issued the Code of Best Practices on Corporate Governance in Nigeria. The SEC code emphasised the role of the board of directors and management; shareholder rights and privileges; and the audit committee. Not only was the code influential, it was also the first to be issued by any regulator in the country.
Although the SEC code presented some sweeping reforms, it was soon found to be inadequate in addressing new challenges. Therefore, in 2006, the Central Bank of Nigeria (CBN) issued its Code of Corporate Governance for Banks in Nigeria Post Consolidation. This code was introduced to ensure accountability on the part of bank CEOs. It specifies fines and penalties, including jail terms for erring CEOs. It prescribes risk management measures within the organisation, particularly emphasising the role and qualification of a company’s internal auditor.
The National Pension Commission (PENCOM) issued its own code in 2008, known as the 2008 PENCOM Code. Subsequently, the National Insurance Commission (NAICOM) issued its Code of Corporate Governance for the Insurance Industry in 2009. These three industry-specific codes were meant to address the issues that were not addressed in the SEC legislation.
However, in 2011, SEC released the Code of Corporate Governance for Public Companies in Nigeria, which effectively replaced its 2003 legislation. This latest law was adjudged at the time as the most comprehensive corporate governance code in Nigeria. The code is anchored on five main principles, which include: leadership, effectiveness, accountability, remuneration and relations with shareholders.
A new study jointly published by the Association of Chartered Certified Accountants (ACCA) and KPMG places Nigeria among the top five countries in Africa for compliance with the Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance. The report examines the corporate governance requirements for listed companies in 15 African countries against the four tenets of corporate governance as underpinned by the OECD Principles. The countries were ranked based on the principles, which include leadership and culture; strategy and performance; compliance and oversight; and stakeholder engagement. Nigeria came behind South Africa, Kenya and Mauritius – but ahead of Uganda in the top five bracket.
Despite these developments, Nigeria lags behind countries like the United Kingdom in terms of corporate governance codes, policies and enabling laws. The UK, through the Financial Reporting Council, regularly reviews and updates the country’s corporate governance codes, principles and best practices. The regulator promotes high standards of corporate governance to foster investment.
The establishment of the Financial Reporting Council of Nigeria (FRCN), through the Financial Reporting Council Act 2011, was widely praised. The Directorate of Corporate Governance of the FRCN has the responsibility to develop principles and practices of corporate governance. The directorate can act as the coordinating body responsible for all matters pertaining to corporate governance in Nigeria. Unfortunately, the council’s attempt to overhaul the country’s corporate governance framework to encourage more disclosure and better governance practices was scuttled last year.
One issue bedevilling Nigeria’s corporate governance landscape is the multiplicity of overlapping legislations. The council tried to address this issue and unify the sectoral corporate governance codes with the National Code of Corporate Governance 2016 (NCCG), released in October 2016. The NCCG – which provides corporate governance legislation for private and public sectors as well as not-for-profit organizations – was suspended by the federal government in November following stiff opposition from various stakeholders. In suspending the code, the Minister of Industry, Trade and Investment, Okechukwu Enelamah, also issued a query to the FRCN for overreaching itself and to essentially explain the rationale for the legislation.
While the political leverage of religious organisations was apparent in the suspension of FRCN code, it is important to state that the corporate governance of charitable organisations, especially religious bodies, needs urgent attention. At the very least, if implemented, the code would foster transparency in the management of these organisations that are becoming behemoths in the country. Effective and frequently updated corporate governance codes are required for a developing country like Nigeria to overcome its development challenges.
Data indicates that Nigeria has lost 75 banks since the advent of banking since 1914. There is evidence suggesting that these bank failures were largely due to weaknesses in corporate governance. A CBN and Nigeria Deposit Insurance Corporation (NDIC) study of distress in the Nigerian financial services sector (October 1995) provides the following data, showing the factors that cause distresses in the banking industry: Economic depression (25%); political crises (17.9%); bad credit policy (25%); undue interference by board members (corporate governance) (32.1%).
In a report presented to the Global Corporate Governance Forum in 2003, Stijn Claessens, Professor of International Finance at the University of Amsterdam, identified several channels through which corporate governance affects the growth and development of a nation. According to him, “The ﬁrst is the increased access to external ﬁnancing by ﬁrms. This in turn can lead to larger investment, higher growth, and greater employment creation. The second channel is a lowering of the cost of capital and associated higher ﬁrm valuation. This makes more investments attractive to investors, also leading to growth and more employment. The third channel is better operational performance through better allocation of resources and better management. This creates wealth more generally.
“Fourth, good corporate governance can be associated with a reduced risk of ﬁnancial crises. This is particularly important, as ﬁnancial crises can have large economic and social costs. Fifth, good corporate governance can mean generally better relationships with all stakeholders. This helps improve social and labour relationships and aspects such as environmental protection. All these channels matter for growth, employment, poverty, and well-being more generally. Empirical evidence using various techniques has documented these relationships at the level of the country, the sector, and the individual ﬁrm and from the investor perspectives.”
Despite the flaws of the NCCG, the unintended consequence of its suspension is the potentially negative impact on investment in the country. The effect of corporate governance on the overall development of an economy cannot be overemphasised. In his foreword to the Claessens’ report, Sir Adrian Cadbury said of the significance of corporate governance for the stability and equity of society: “The aim is to align as nearly as possible the interests of individuals, of corporations, and of society. The incentive to corporations and to those who own and manage them to adopt internationally accepted governance standards is that these standards will assist them to achieve their aims and to attract investment. The incentive for their adoption by states is that these standards will strengthen their economies and encourage business probity.”
It is for the sake of bolstering investor confidence and attracting foreign investments in Africa’s largest economy that the International Finance Corporation (IFC) and SEC jointly developed and launched a Corporate Governance Scorecard for publicly-listed companies in the country.
Efforts should be made to quickly resolve the issues with the FRCN harmonised corporate governance code for Nigeria. Moreover, the council should be provided the independence it needs to function effectively and promote higher standards of corporate governance and reporting in the public, private and non-profit sectors.